Earlier this month, I took a look at the potential opportunity for Intel (NASDAQ:INTC) to put cellular modems inside of laptops. My conclusion at the time was the following: "I seriously doubt that many PCs will come packed with cellular connectivity for the foreseeable future."
However, on Intel's most recent earnings call, CEO Brian Krzanich claimed that "more than 15%" of PCs by the year 2018 will feature cellular basebands.
While it's anybody's guess as to whether this will actually happen or not, it's worth taking a look at what this would actually mean for Intel's financials should it actually come true.
The incremental content question
As far as cellular goes, Intel provides the RF transceiver as well as the cellular baseband processor. I have guessed in the past that a stand-alone high-end cellular baseband and RF transceiver solution costs about $20, and Russ Fischer, writing for Seeking Alpha, also thinks that Intel's latest cellular solution should fetch about $20.
To that end, I'm going with an estimate of $20 for the baseband and RF transceiver.
Now, if we assume that market research firm IDC is correct that PC demand will contract to 287.3 million units by 2018, and if we assume that Intel sells a cellular solution into every cellular-capable PC (this is optimistic), then this would imply about $862 million in incremental revenue to Intel.
Not a game-changer, but certainly not chump-change.
Further quantifying the impact
By the time 2018 rolls around, Intel is likely to be manufacturing its cellular baseband processors at its own factories (currently they are built at external chip manufacturers). Further, I suspect that Intel will be able to build PC-oriented cellular solutions on fairly mature manufacturing technologies, giving it a very good cost structure.
Assuming negligible incremental operating expenses, $862 million in PC-oriented cellular baseband revenue could add, at 60% gross margin, an incremental $517 million to the company's gross profit line, and something close to that in additional operating income.
Some caveats to this analysis
There are a number of caveats to this analysis. First off, by 2018, Intel is likely to be quite adept at providing system-on-chip solutions either with or without the cellular baseband processor integrated. While Intel is likely to be able to charge more for processors with integrated baseband processors, it's not clear how much additional value Intel can capture with an integrated solution versus a stand-alone solution.
Next, it's not clear if Intel will win the baseband slot for all cellular-capable PCs. For example, while Intel designs and distributes its own Wi-Fi chips, many PCs ship with Wi-Fi solutions from its competitors.
Finally, the 15% attach rate may not actually come to pass, and $20 may not be an accurate estimate of the incremental dollars Intel could get per-unit.
Foolish bottom line
Perhaps the best part of this is that Intel essentially gets any upside from cellular basebands inside of PCs "for free" since the technology will be developed regardless of whether 15% or 1.5% of PCs will feature cellular connections by 2018.
For example, cellular basebands are required in smartphones, and Intel estimates that by 2018, 35% of tablets will have cellular connectivity.
Those markets alone justify the investment, and anything beyond them is icing on the cake.